Often times entrepreneurs are surprised by the relative ease with which they are able to raise seed capital. Whether funding is raised from friends and family, angels or early stage institutional investors, in most cases the premise of the funding is a good idea. And early proof points that provide the investor confidence that the founder is capable of building a company around his or her vision. However, the bar is normally raised significantly when it comes time for a Series A. And that heightened bar often catches founders by surprise.
90% of start-ups fail
It is broadly acknowledged that 90% of start-ups fail, however, in this article Sebastian Quintero looks at startup failure rates by stage. What he shows clearly is the rate of failure changes dramatically as you work through the growth and funding cycle.
As Virtual CFO’s and Outsourced Finance professionals, our focus is helping companies from seed to Series B and we have witnessed first hand the inflection points that come with those funding rounds. Especially the importance of the Series A.
A closer look
- The analysis shows what most entrepreneurs would tell you, that it’s really hard to get to a Series A after a seed round. 80% of companies successful in raising a seed round never raise a series A. However, 50% successful in Series A, reach a Series B.
- Further, since 97% of these same companies also never exit or IPO, it is clear that the Series A is a crucial inflection point for success or failure of a Start-up.
One reason for this rate of failure is that Series A investors are looking to invest in a business, not just an idea. Since we started Positive 4 years ago, we always said that “Most businesses are started with an idea and that most fail, not because the idea was not sound, but because business got in the way.”
That means that founders need to use seed funding not only to continue development of their idea, but to begin to build a business around it. A business that is fundable.
With stats like these, it makes sense to get some help to ensure success. A fractional CFO supported by outsourced finance can help an enterprise scale and create the infrastructure for funding. And this can be done at a much lower cost than building this capacity in house.
How does it help to hire fractionally rather than in-house to achieve success?
An experienced and connected CFO is more likely to bring your house into order from a finance perspective. They will have the connections and knowledge about where the best investors will be for your business. They are a partner in building your business, and you do not need a full time CFO until much later in your lifecycle. Not all fractional CFOs are created equally! Make sure yours has the relevant experience!
A solid financial model is critical to getting investment into your company. This is not just a spreadsheet. This is a process in representing your business assumptions and KPI’s in a fashion that is understandable. You need a professional team who can help you translate your business into a model. The model should show what it will be as it grows up, and what it takes to get there.
Connecting strategy to execution across the business.
A CFO often is a key role in taking the business strategy and model and linking that to execution through a management cadence. A management cadence should leverage ongoing performance monitoring, measurement and re-forecasting.
Managing the Board Calendar.
Often times your Board members are key ambassadors with new investors. Ensuring that the Board and management are synced is critical for companies as they progress from seed to series B. A CFO is often responsible for setting and managing this calendar.
Reliable financial information.
Speaking about your financials in a consistent fashion across time horizons is important when speaking to investors. Knowing from a financial perspective how you are doing, why and what you are going to do about it is a conversation prospective investors want to have. You need to be able to speak to these numbers confidently. If you can’t, you should consider getting some help and hiring a proficient outsourced finance team.
(hint: we do that)
If you are considering fundraising at any stage, consulting with an organization that has proven success doing this is critical. You need to lean on an expert who has helped other companies like yours achieve their goal. As a result will increase your likelihood of getting beyond seed to Series A or Series B.